Institutional investors, training their firepower in the direction of Philip Morris Cos. Inc., K mart Corp. and UAL Corp. in just two weeks, have sunk one restructuring plan and fired shots across the bows of the boards of two other companies.
Now, in each case, they're waiting for reaction from the boards of directors and top management.
In the past two weeks, institutional shareholders have:
Protested a decision by the Philip Morris board not to split off the food companies from the cigarette company. Now they're waiting for an agreement from the board to meet with the investors.
Rejected a K mart plan to sell stock tied to the earnings of the specialty store chains it owns. They await a new plan of action from K mart's board.
Objected to and threatened to derail UAL Inc.'s proposed employee buy-out because of revised terms that give employees a greater stake in the company. Investors say the sweetened terms for employees further dilute their holdings.
Philip Morris face-off
The institutional shareholders of Philip Morris, New York, are seeking - and expect to get - a meeting to discuss management's view of the structure of the company.
"I am asking for the directors to justify their positions," said Jon Lukomnik, deputy comptroller for pensions for the City of New York.
"There is widespread dissatisfaction with both the lack of action and the lack of explanation," Mr. Lukomnik said in reference to the question of splitting the company.
Given the size of the asset base of investors involved and the possibility of others working behind the scenes, a meeting seems likely, he said.
"I will go out on a limb here. We will get a meeting," Mr. Lukomnik said. If not, "other things will happen."
Some shareholders want to split the company to increase its total value, reasoning that Philip Morris' tobacco units are dragging down the market value of the rest of the company.
The first formal action was taken May 24, a day before a Philip Morris board meeting, when six large shareholders, acting as members of the Council of Institutional Investors, Washington, requested a meeting in a letter to Michael A. Miles, Philip Morris' chairman and chief executive.
At the board meeting, the company elected to take no action on a possible split.
About a week later, another more strongly worded letter was sent to Philip Morris directors, again signed by representatives of the six large shareholders.
The second letter hinted at possible proxy voting action if the shareholders couldn't get a meeting to discuss concerns about directors who "have been too willing to cling to old strategies and too reluctant to consider new variables and concerns."
News of the letters hit the press a few days after they were mailed.
The Florida State Board of Administration, Tallahassee, a participant in the first letter, was replaced in the second letter by the Pennsylvania State Employes' Retirement System, Harrisburg.
The other five were the California Public Employees' Retirement System, Sacramento; the Connecticut Retirement & Trust Funds, Hartford; the City of New York; the International Brotherhood of Teamsters, Washington; and the United Food & Commercial Workers, Washington.
Marvin Hubres is director of field service for the United Food and Commercial Workers union, whose workers are employed by Philip Morris' Kraft unit.
The union holds "several thousand shares" of Philip Morris.
Mr. Hubres said the union supports the idea of splitting the company.
The company's three units - food, U.S. tobacco, and non-U.S. tobacco - are almost separate units anyway, he said.
"I think it's a very normal request" to meet with management and directors, he said.
K mart revolt
Having trounced K mart's plans to sell stock tied to the earnings of its specialty retail stores earlier this month, institutional shareholders are waiting for the company to propose an alternative restructuring plan before deciding other steps to take.
"It's their serve. They've got to offer plan B, whatever it is," said James Severance, portfolio manager at the $35 billion State of Wisconsin Investment Board, Madison.
The fund led the revolt against the giant retailer's plan to sell stock linked to between 20% and 30% of the earnings flow from its four specialty retailers.
K mart's management could present another plan as early as June 21, the next board meeting, suggested Walter F. Loeb, a retail securities analyst and president of Loeb Associates, New York.
Mr. Loeb anticipates the company's second plan might include a partial spinoff of the company's specialty businesses, leaving majority ownership still in the hands of the corporation.
The Wisconsin fund, which owns about 3 million shares of K mart, had denounced the initial proposal as "far too modest" and an "ill-conceived capital structure." It recommended an outright sale or spinoff of the specialty stores. In a letter seeking support from other shareholders for its proxy fight, the Wisconsin fund noted the company's proposal could possibly dilute existing holdings, and cause confusion in the capital markets.
Other public pension funds are taking cues from Wisconsin. K mart Chief Executive Joseph E. Antonini "has to propose the next change in corporate strategy, but he has got to propose it aware ... that a very important constituency, the owners of the company, have rejected the last one," said New York's Mr. Lukomnik. The $50 billion New York City Retirement Systems own about 2.7 million of K mart's estimated 416 million voting shares.
The $37 billion Florida State Board, which owns about 3.5 million K mart shares, also is waiting, said Luther Jones, manager of corporate affairs. "At this point we just want to evaluate the proposals as they come forward," he stated.
Standing firmly behind the Wisconsin pension fund, institutional shareholders succeeded in blocking the Troy, Mich., retailer's plans to create new classes of common shares linked to earnings of its four specialty units - Borders-Walden bookstores, Builders Square home improvement stores, Office Max stationery stores and the Sports Authority sporting goods retailers.
Under the proposal, the company would continue to own the underlying assets of its specialty retailers, while letting new shareholders receive dividends linked to the performance of those units.
At the company's June 3 annual meeting, the proposal received 61% of the votes cast, but less than the 50% of all outstanding shares needed to pass under Michigan law. This primarily was because shareholders abstained from voting a hefty 27.8% of the company's shares - tantamount to voting against the proposal.
The company needed shareholder approval for its restructuring because the plan called for the creation of a new class of common shares, and doubling to 3 billion the number of authorized shares. The company also did not adopt six other proposals, even though shareholders approved them, because they were linked to the failed restructuring plan.
Corporate governance experts and retail analysts note the pressure on Mr. Antonini to come up with a more acceptable restructuring plan is intense.
The company's per-share earnings are expected to drop to $1.15 in 1994, slightly more than half of the $2.02 per share it earned in 1992, and the company last month reported same-store sales - a benchmark for retailers' performance - dropped 3.1% from a year earlier. Earlier, the company had announced it expected sales for the first quarter of financial 1995 to be well below previous year levels because of lower sales and an inventory problem.
"Mr. Antonini is very much on the spot to come up with a workable strategy," said Kurt Barnard, president of Barnard's Retail Marketing Report, New York. Mr. Barnard estimates Mr. Antonini has until year end to present a second restructuring plan. The company also needs to raise more than $1 billion to continue with its plans to modernize its stores and sell more merchandise in those refurbished stores, Mr. Barnard pointed out.
The company is aiming to put another plan on the table "in a reasonably prompt manner," said Orren Knauer, K mart's director of investor relations. But Mr. Antonini said the company will continue with plans to modernize its flagship K mart stores while examining alternative plans for its specialty stores.
UAL shareholders are divided over the company's revised buy-out terms because of the economics of the transaction.
John Neff, manager of the Vanguard/Windsor Funds Inc., UAL's second largest shareholder, has publicly said he plans to vote against the transaction because the company revised ownership terms for employees that further dilute holdings of other shareholders.
UAL agreed to the new terms, offering employees 55% of the company instead of the original 53% in exchange for pay and workplace concessions after its stock slumped recently and employees threatened to unravel the buy-out.
But Alliance Capital Management, the airline's largest shareholder with approximately 17% of its shares, reportedly still supports the deal.
In recent comments, Al Harrison, Alliance's vice chairman, said the deal still would be the best option for the company.
The Florida State Board, which owns 649,200 UAL shares, has not yet decided how to vote, Mr. Jones said.